Stuart E. Lucas - The Taxable Investor's Manifesto

Let me be clear. I firmly believe that it is the civic duty of every successful American to pay taxes; it's a responsibility and a privilege. Cognizant of the many benefits of living, working, and raising a family here, I am happy to pay my share. This manifesto simply advises that taxable investors should develop investment strategies with the tax and estate planning implications rigorously embedded in their design and management process. Doing so is common sense, if not commonly employed. Plus, it reinforces a healthy long-term perspective, a business-owning mindset, and, with a vibrant economy, a larger tax base.

For those of us who are trying to save for retirement and accumulate additional wealth through our careers, through employment income or by starting and growing businesses, the difference in asset accumulation, financial security, and lifestyle between average wealth management and good wealth management is huge. The manifesto's strategy becomes even more compelling when an investor is managing wealth multigenerationally. It is also a guide for navigating over much longer time frames and through a maze of estate and gift tax laws.

The quest to understand and manage taxable wealth is personal for me. My great-grandfather started the Carnation Company in 1899. After 86 years the company was sold and we shifted from being a business-owning family to a “financial family.” I've been lucky: lucky to be born into wealth, lucky to get a great education, lucky to get superb training as a professional investor, lucky to teach. All these experiences, all the learning, are crystalized in this manifesto. My goal in writing it and sharing it is to change the world in one small way: together, with common knowledge and resonant voices we can find a better way to manage taxable financial assets, secure financial futures, and provide higher-quality advice.

My previous book, Wealth: Grow It and Protect It, was published in 2006. Its goal is to help wealth owners to manage their wealth strategically and comprehensively across business, financial, and cultural dimensions. It all starts from establishing a purpose for their wealth, based on their core values. More than twelve years and a second edition later, the book is still in print. People are still buying it, reading it, implementing it, thanking me for writing it, and coming to me for further advice. With some frequency, readers show me their copy with 30 separate pages or more dog-eared and highlighted. It's incredibly gratifying to be able to help people in this way. Hopefully, The Taxable Investor's Manifesto will have similar impact and similar longevity.

In Wealth, I offer eight principles of wealth management. The very first one is: Take Charge. Over the last 35 years as the wealth strategist on behalf of my clients – including my family – and myself, I've learned that no one is in better position to optimize your wealth than you.

In writing The Taxable Investor's Manifesto, I've drawn from a lot of sources: from the wisdom of others, from experience gained from making mistakes with my own money, and from careful analysis across investing, tax, and estate planning disciplines to figure out how to do it better. What I've learned applies to every taxable investor, regardless of how much wealth he or she has been fortunate to accumulate. After reading and studying you will understand why taxable investors and their advisors need to think and act differently, and you will learn how to do so. Integrating the combined effects of investing, tax management, and estate planning is good financial management and good business. Good financial management leads to effective wealth management; doing it right will help you grow your assets faster and with less effort.

Managing taxable wealth well can be powerfully simple: lower friction costs, raise return potential, and extend your time horizon (in the context of this book, friction costs are the combined drag of fees and taxes). Armed with a few key tools for success – clear objectives, aligned interests with your advisors, a decent system of accountability, and the discipline to persist with your game plan – your money will work for you, not the other way around. Then you can focus most of your attention on what really interests you and what you're really good at. A straightforward strategy is the right answer for most people who have full lives, are leading rewarding careers, and whose careers, families, and other callings are deserving of full attention. This integrated approach to taxable investing is a step-change in thinking that can help you build a more secure future and a more meaningful livelihood in an uncertain world. Nevertheless, because inertia is powerful and people don't change easily, unless you push for change and remain vigilant, change won't happen.

You can also make wealth management really complex. Complexity can add additional value, especially when managing on a multigenerational basis. But the hunt for superior investment returns – the place where most investors and most financial advisors focus their attention – is an extraordinarily competitive zero-sum game. You are competing against, or trying to align with, hundreds of thousands of well-trained professionals, most of whom extract high fees for uncertain value. Those who extract high fees have the resources and incentives to craft highly persuasive marketing efforts. 1 Is it their marketing or their skill that makes you think that by hiring them you will outperform? Can you tell the difference, especially after tax?

Adding to the challenge, good estate planning can create more value, more predictably, than investing. Good planning requires experienced, interdisciplinary talent and finely crafted strategy. Good estate planning also often leads to splitting assets into many small, legally distinct components and then needing to reassemble them to make the whole worth more than the sum of the parts. One friend calls it trying to put Humpty Dumpty back together again. Governance and administration become really complicated without good systems to manage all the disparate bits, individually and collectively. To pursue this complex path, it really helps to have large-scale, uncommon insight, shrewd hiring practices, and strong discipline. You will need help; the right help is essential.

In this book, I explore both the straightforward and the more complex path. Fortunately, any family investment office, business owner, successful career builder, or young professional, regardless of the size of their wealth, can achieve success using either path. They simply need to match skill with strategy, build the right support structure, and follow the guideposts in this manifesto. Either path creates multiple ways to add value and does so with high odds of success; neither one embraces the traditional “holy grail” of “beating the market,” upon which most wealth advisors market their wares.

For those readers who are interested, the manifesto cites academic and other well-researched literature to supply you with supporting data for key concepts. There is good research about taxable investing out there, but it is diffuse and hard to find. This manifesto aims to provide a single, comprehensive, accessible guide that taxable investors and their advisors can use to sharpen their own thinking, align interests, and improve results over decades, even generations, by millions of dollars.

The Taxable Investor's Manifesto is organized in a straightforward manner. Chapters 1to 7describe seven value drivers that pertain to everyone and that are straightforward to execute. They should be approached as a coordinated strategy, not something from which to cherry-pick one or two ideas. Each component adds value. Collectively, they are at their most powerful and profitable; if one component fails, you still have multiple ways to win. One can sum up this advice as a Hippocratic Oath for taxable investors: First, do no harm.